By Jay Fishman, J.D.
The Department of Banking and Securities has amended its securities rules in their entirety, primarily to non-substantively re-write the rules in more plain English for better clarity, to replace outdated references to "Commission" and "NASD" with "Department" and "FINRA," respectively, and to repeal a number of outdated rules. The Department has additionally adopted a handful of new rules and some significant rule changes. The changes took effect on January 13, 2018 and are highlighted below.
Federal covered securities. The Department added a provision to its federal covered securities rule to cover 18(b)(3) offerings in light of the SEC’s adoption of Regulation A + rules. The added provision allows the Department to create an order for issuers intending to make an 18(b)(3) offering in Pennsylvania, such as a Tier 2 offering under federal Regulation A, to submit to the Department: (1) SEC-filed documents pertaining to the offering; (2) a Department-specified notice; and (3) a prescribed fee.
Private fund adviser exemption. Private fund advisers are exempt from investment adviser registration requirements if neither the advisers nor their advisory affiliates are subject to "bad boy" disqualification provisions under federal Regulation A Rule 262, and the advisers electronically file with the Department through the IARD the reports and amendments required for exempt reporting advisers under SEC Rule 204-4. The exemption takes effect when the reports and amendments are filed and accepted by the IARD on the Department's behalf.
Federal covered investment advisers, i.e., private fund advisers registered with the SEC, are ineligible for the exemption and, therefore, must comply with Pennsylvania notice filing requirements. Investment advisers that become ineligible for the private fund adviser exemption must, within 90 days following their ineligibility, register or notice file as investment advisers (as applicable) in Pennsylvania. Investment adviser representatives employed by or associated with exemption-eligible investment advisers are, themselves, exempt from investment adviser representative registration if they do not otherwise act as investment adviser representatives.
Additional requirements for private fund advisers to certain 3(c)(1) funds. Private fund advisers advising at least one fund under Section 3(c)(1) of the Investment Company Act of 1940 that is not a venture capital fund must, in addition to meeting the above-mentioned basic requirements, (1) advise only those 3(c)(1) funds, other than venture capital funds, whose outstanding securities (other than short term paper) are beneficially owned entirely by persons who would each meet the "qualified client" definition in SEC Rule 205-3 at the time the securities are purchased from the issuer, and (2) disclose in writing, at the time of purchase, to each beneficial owner of a 3(c)(1) fund that is not a venture capital fund: (a) the services, if any, the advisers will provide to them; (b) the duties, if any, the advisers owe them; and (c) all other material information affecting the beneficial owners' rights or responsibilities.
Private fund advisers must annually obtain audited financial statements for each 3(c)(1) fund that is not a venture capital fund and deliver a copy of those audited financial statements to each beneficial owner of the fund.
Grandfathering exemption for investment advisers. Notwithstanding the above requirements, private fund advisers to one or more 3(c)(1) funds that are not venture capital funds but that have one or more non "qualified client"- defined beneficial owners can still qualify for the exemption if: (1) the subject fund(s) existed before this rule’s effective date; (2) the funds cease to accept beneficial owners that are not qualified clients as of this rule’s effective date; (3) the adviser makes the above "service, duty and material information" disclosures to all beneficial owners of the fund; and (4) the adviser delivers the above audited financial statements as of this rule’s effective date.
Terms defined. The following terms are defined for purposes of the private fund adviser exemption: "private fund adviser," "qualified client," "qualifying private fund," "3(c)(1) fund," "3(c)(7) fund," and "venture capital fund."
Solicitor exemption. A solicitor is exempt from Pennsylvania investment adviser and investment adviser registration requirements if the solicitor is in compliance with Pennsylvania’s "cash payment for client solicitation" rule, provides impersonal investment advisory services, and is not subject to any Pennsylvania Securities Act "bad boy" disqualification provisions.
Existing securityholder exemption. Pennsylvania’s existing securityholder exemption is retitled the "existing equity securityholder" exemption.
Net worth requirement for IAs registered as BDs. Investment advisers registered as broker-dealers that have a Pennsylvania principal place of business must maintain the minimum net capital required for broker-dealers under Exchange Act Rule 15c3-1.
Broker-dealer recordkeeping. Broker-dealers registered in Pennsylvania, but not with the SEC, who fail to create and maintain the records required by Exchange Act Rule 17a-3 must immediately notify the Department of this failure and file a report with the Department, within 24 hours of filing the notice, setting forth the steps that have or will be taken to comply with this rule provision.
Abandoned applications; Industry person applications. The Department may consider "abandoned" a broker-dealer, agent, investment adviser, or investment adviser representative application on file with Department for a minimum of six consecutive months if the applicant failed to: (1) respond within 60 days following the Department’s sending the applicant a first class mailed notice to the applicant’s last known address; (2) respond to any request for additional information; or (3) complete the showing required for action on the application.
Securities registration applications. The Department may consider "abandoned" a securities registration application on file with the Department for a minimum of 12 consecutive months if the applicant failed to: (1) respond within 60 calendar days following the Department’s sending the applicant a first class mailed notice of abandonment to the applicant’s last known address; (2) respond to any request for additional information; or (3) complete the showing required for action on the application.
Senior specific certifications/professional designation: Prohibition. The Department, under specified circumstances, will deem a dishonest practice a broker-dealer’s, agent’s, investment adviser’s, or investment adviser representative’s using a certification or professional designation to declare its expertise in offering, selling, or providing advice about securities to senior citizens.
Dual registration of agents—REPEALED. A rule permitting agents to register with more than broker-dealer was repealed.